Know More About the Strategy

Such an option strategy is essentially the same as shorting a stock, except that the position is entered into with options.

Such a strategy generally requires a smaller margin investment over simply shorting the equivalent underlying security.

This strategy can be used by an investor in certain strategies as a substitute for shorting the underlying stock.

How to build this strategy?
This strategy has two legs:
Leg 1 – Buy 1 ATM Put
Leg 2 – Sell 1 ATM Call

Credit Spread/Debit Spread
This depends on the price of the call and put options.

If the premium of the put option is higher than the call option, then such a strategy would be a Debit Spread.

If the premium of the put option is lower than the call option, then such a strategy would be a Credit Spread.

Profit Potential
Since this strategy is essentially the same as shorting a stock position, the profit potential is unlimited.

When is this strategy profitable?
The strategy is profitable when the price of the underlying security is lesser than the strike price of the put option purchased.

Risk
Since this strategy is essentially the same as shorting a stock, the risk faced is unlimited.

When is this strategy unprofitable?
The investor stands to loose if the price of the underlying security rise sharply.